On the profitability and welfare effects of downstream mergers

We consider an upstream firm selling an input to several downstream firms through non-discriminatory two-part tariff contracts. Downstream firms can alternatively buy the input from a less efficient source of supply. We show that downstream mergers lead to lower wholesale prices. They translate into lower final prices only when the alternative supply is in-efficient enough. Downstream mergers are very profitable in this setting and monopolization is the equilibrium outcome of a merger game even for unconcentrated markets. Key words: dowsntream mergers, wholesale price, two-part tariff contracts